TDS on Life insurance policies w.e.f 1st October 2014

If you have any life insurance policy, then recently you must have received a mail from your insurer regarding the TDS on life insurance policies to be deducted out of your policy proceeds. I have been receiving many queries regarding this, saying they are feeling cheated since at the time of buying they were told that the policy proceeds will be tax-free.

Though I have answered them as per the respective policies they have, it is important for all of you to know about the change in taxation law which was announced in the Budget 2014. To remove the confusion I have written this detailed post on TDS on life insurance policies.

Tax laws related to insurance policies

Life insurance policies are structured around 2 income tax sections. Section 80C and Section 10(10)d.

If the Life insurance policy you have, be it ULIP or Endowment, is providing you insurance cover of 10 times of your annual premium, then you can claim tax benefits under both the above-mentioned sections.

In other words, if the premium you are paying is 10% or less of the sum assured/death benefit then you can enjoy the benefit of section 80c and 10(10d).

Important: If the policies were bought before April 2012, then to claim benefit under 80C and 10(10d), your insurance cover should be at least 5 times of annual premium.

But if your policy is not satisfying these conditions then your 80c benefit would be restricted to 10%/20% of sum assured as the case may be and your policy maturity proceeds will not be tax-free under section 10(10d)

Let’s understand this in some cases:

Case 1: Rajan has one Life insurance policy, bought in 2005, with an annual premium of Rs 50,000/-. The policy has sum assured of Rs 3 lakh. The policy is due to mature next year in 2015. He wants to know if the maturity proceeds are taxable?

Answer: NO. As the policy was bought before April 2012 and has sum assured more than 5 times of premium amount, then it satisfies the condition of section 80C and 10(10d) and thus is not taxable.

Case 2: Samar has bought one pension plan in 2007, with an annual premium of Rs 10,000/-. It doesn’t have any sum assured attached to it. What would be the taxability of this policy on maturity?

Answer: As theirs is no sum assured attached to this policy then it doesn’t attract section 10(10D) and thus the maturity/surrender proceeds will be taxable. However being a pension plan, the premium payments come under section 80CCC, and he can enjoy the tax benefits on premium payments.

Case 3: Last year in 2013 Simran bought 2 policies, one a pension plan for her retirement planning and other one ULIP for investments. In a pension plan, she’s paying a premium of Rs 20000 and has insurance coverage as “higher of fund value on the date of intimation of death or 105% of premiums paid”. While in case of ULIP she is paying a premium of Rs 1,00,000/- and having a cover of 15,00,000/-. She want to know the taxability of these policies on maturity?

Answer: Though Simran has some insurance cover in case of pension plans this is not satisfying the condition of 10 times of annual premium. The other ULIP policy has sufficient cover.

So in case of the pension plan maturity proceeds or even the monthly pension amount is taxable, but in case of ULIP maturity proceeds will not be taxable.

Case 4: 2 years back in Jan 2012 Rahul bought one single premium plan, with an insurance cover of 1.25 times of premium, he wants to withdraw the policy after completion of 3 years. He wants to know if the Maturity proceeds would be taxable.

Answer: Yes, the maturity proceeds would be taxable. Since the policy was brought in Jan 2012, so in this case the policy should provide a cover of at least 5 times of annual premium, to make it tax-free.

Applicability of TDS on life insurance policies

TDS on life insurance is applicable on the maturity proceeds of taxable policies, as explained above i.e which are not satisfying the condition of death benefit/Sum assured equal to or more than 10 times of annual premium.

Finance Act 2014 has introduced a new TDS provision under section 194DA in the Income Tax Act, 1961 on insurance policies

As per the new section (effective from 1st October 2014), if the policy proceeds are not eligible for exemption under Section 10(10D) of the Act and your total payout value (policy proceeds due ); for a year exceeds Rs. 1 lakh, then the tax deductions will be as under:

Earlier the onus is on policyholder to disclose the type of policy and pay tax(if any) on the maturity proceeds, but slowly this has become a point of tax evasion. Many people evade it knowingly and others under ignorance. This TDS on life insurance policies would automatically plug this issue and bring the attention of taxpayers and income tax authorities on the taxability of maturity proceeds

TDS on Life insurance policies – What to do?

TDS on life insurance policies is applicable from 1st October 2014. There’s nothing much policyholders can do now about it, but those who now know that their policy is taxable should get their PAN number registered with the insurer to avoid getting 20% TDS deducted.

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CIRCULAR NO This is where there is some ambiguity amongst many of our readers. In such a case, we refer to Circular No. 7/2003 dated 05-Sep-2003, Finance Act 2003 from the Income Tax department. As per that, tax should be paid on income accrued on life insurance policies which does NOT include premium paid by the assessee.

I spoke to many CAs on this. they are also not clear. I could not find any appellate tribunal case on this to get clarity. In my view, take your CA in confidence and do as he/she says, as finally, he would be the one who has to reply the concerned authorities.

Some Popular CAs in India concur to the views written in my article. Like I have read somewhere Sandeep Shanbhag has mentioned the same thing in one book. You may write to him directly with reference to the Circular you mention

SIR,
IS THERE ANY CLARITY ON THIS ISSUE YOU JUST MENTIONED , NOW? AS I AM NOT SURE AS ‘FULL MATURITY AMOUNT IS TAXABLE’ OR ‘MATURITY AMOUNT – premium paid’ will be taxable. as it will make a big difference in everybody tax liabilities.

Mr Rathee, as I said till there is no Judgement by Appelette Tribunal on any of such case, everything is Interpretation. There are many investors who have filed returns considering the Profit part as the only taxable amount, there are others who have filed with the understanding that complete money is taxable. Now it is up to the IT authorities to come up with a query and their CAs to answer it.
My Limited understanding still goes the same. If Policy is taxable then the full proceeds would be taxable.

Took three Jeevan Akshay-VI policies in November 2016 on NRI status
with mandate to credit monthly annuity to our NRE accounts. No issues until
April 2018. However, they credited annuity for April 2018 after TDS (claiming u/s 195 – DTAA). Raised complaints at all levels of LIC and so far unable to get refund of TDS. LIC did not inform us of starting TDS w.e.f 1st April 2018. LIC deliberately concealed the intention to start TDS and also failed to
advise us. Can we get the policies cancelled and get the Purchase Price since the policy was on 100% purchase price return to nominees on our death?. Your comments would be appreciated. Baby Samuel, UAE

Sir, my LIC policy bought on 31-3-2012, which premium is 2 Lakh and sum assured is 13,90,242 which full fill the tax exemption criteria. I surrendered this policy on 15-Aug-2016 (more than 4 years) and got 3.50 Lakh surrender amount against my premium of 6 lakh. According to this fact no Tax liability on the surrender proceeds but LIC has deducted TDS amount of surrender proceeds. Why they deducted TDS, and if they deducted TDS wrongly then can i claim refund of this. Please clarify

It seems your policy issuance date was, post 01.04.2012, if not then there must be some clause on Sum assured in your policy related to the reduction of Sum assured if policy gets surrendered before completion of the policy term
If both the above is not the case then there are chances of the mistake which first gets clarified by the LIC people before filing for a refund.

dear sir,
i have withdrawn a sum of rupees 199410 from single premium insurance policy and insurance company has deducted rupees 1994 from the amount. Please tell me where to show this income in ITR 2.
regards
prabhakara

Sir,
I have read many of those replies by you. First of all thanku for guiding us with the minute details of the areas taxable under any premium. I too have a ICICI Pru pension plan of Rs 70,000 for 5 years. The plan has vested this month and the net value is almost 5 lakh which has been fully deposited to my bank accout. I want to know whether this amount is taxable, whether there will be any tds deducted by bank and if yes whether i can claim it back the next year. the ICICI officers has been telling us that it will beunder 20% to 30% slab. I also want to bring in your knowledge that i have already submitted my PAN card with the ICICI office so Please tell me whether it will attract a tax of 2% or 20%-30%.

In the case of Pension Policies, there is no TDS provision unless you are an NRI. But the amount is Full taxable. I mean the complete proceeds.
It may be considered as the 1/3rd amount was withdrawn tax-free as commutation of pension and rest withdrawn as maturity proceeds. If this works then 2/3 of the proceeds would be taxable

Sir,
What happens when a NRI surrendering Pension Policies who is covered under DTAA Countries that state that “other Income will be taxable in the resident country”. Infect Insurance company don’t deduct TDS if the Form 10F and Tax Residency Certificate is submitted for the FY in which the Policy is surrendered.
However to get Tax Residency Certificate you have to be in DTAA countries like more then 183 days if not TDS is deducted so if you surrender the policy in the 1st 6 months how can you claim the TDS back latter on after submitting Tax Residency Certificate with your return?

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